January 3, 2008

Does Cleveland Really Matter?

Looking back at my writing over the past year, the dominant focus was first on the housing and the South Florida condo glut and then later on the sub-prime mortgage mess and resultant worldwide credit squeeze. The article that stimulated the most controversy and a record number of (negative) responses was my piece early in the year titled, “The Real Estate Trap.” In that piece I questioned the view that Real Estate is the best asset to invest in and I provided support for my view, that holding good quality stocks for the long-term is a superior strategy.
 

OUR ROLE IS IN YOUR LIVES

As a disclaimer of sorts, regarding the discussion to follow, I want to briefly comment on why you employ us. According to the sign on the southern wall of the Frye Financial Center building, our team of Financial Professionals and Attorneys helps clients  “Create, Protect and Preserve Wealth.” In other words, we are paid to focus our talents, energies and expertise on maximizing your families’ financial/investment planning and results. As such, our responses to economic and geo-political events are developed within that context and from that perspective only. We use an unemotional, highly focused approach in our research and analyses and in the formulation of our long-term strategies and short-term tactical decisions.                                       

CLEVELAND, OHIO

One of the two people that I know from Cleveland is a former employee of mine.  When he first interviewed with us, he had just arrived in South Florida and I was concerned about whether or not he would adjust to living here. “You know you’re not is Kansas anymore,” I warned him. He replied that he was in need of a change, had friends in Miami and wanted to make Miami his home.   By the way, that is the standard response given by all out of town interviewees when asked if they are sure they will be staying long term.  Many of you know how this particular tale ended. Within 2 years, although we had developed a wonderful relationship and he loved his job, Jeff’s homesickness got the better of him and he returned to his family and home-state.

I have never been to Cleveland, Ohio. My only knowledge of the area is from what I have read and heard about it. I do know that “USA Today” labeled Cleveland the nation’s poorest city a couple of years ago. I also know from a recent article in the Economist, that the housing crisis and foreclosure debacle has hit the area very hard. The article mentions the Cleveland suburb, Maple Heights, as a typical aging suburb in the industrial Mid-West, with small colonial-style homes on tree-lined streets. The problem though, is that one in every 12 homes stands empty, repossessed after mortgage defaults.

CLEVELAND VERSUS MIAMI

It would seem to me that the cities of Cleveland and Miami couldn’t be more different. The sun shines brightly and warmly on South Florida for most of the year ---not so in the  Mid-West. I would imagine that the vast majority of the people currently living in Cleveland suburbs were born in the general geographic region. South Florida, by contrast, is a melting pot of diverse people and cultures. In this unique region, different languages, foods, cultures, values, all collide and, yet, mesh together at the same time. The taste of the resulting soup from all of these potentially volatile ingredients is hard to describe---I just know that the taste works fine for me, and for most of us who call South Florida home.

These two vastly different American cities are both living through a housing crisis. However, here in Miami the crisis has a component, unknown to those in Cleveland. For many of us here and around the country, it is difficult to empathize with our local condo developers or condo speculators who ignored every economic principle of reason and prudence in helping us get into our current mess. Taking a drive on A1A, through the City of Sunny Isles, a claustrophobic sensation now overwhelms ones senses as one views the high rise condo ghetto that has arisen where quaint deco motels once knew their heyday. The overdeveloped strip, with nary a speck of open sky or ocean water peeking through, is what the mostly out of town developers, with their “visionary” plans have left us. “Ditto” for what has occurred along Biscayne Bay, the Downtown/Brickell area and many other parts of South Florida.

On the other hand, it is easy to be sympathetic with the floundering homeowner of Cleveland, Ohio. He may have seen his industrial job outsourced to China. At the same time he is seeing his gasoline, grocery and home utilities bills soaring. The price of a gallon of milk at the local supermarket has gone from $3 dollars to $4 dollars over the last few months. His adjustable mortgage interest rate is about to tick higher, causing even more pain as he enters 2008. No, this hapless Cleveland guy is no greedy developer or condo speculator .He just got caught in some economic bad dream that is very hard to wake up from.

SO DOES CLEVELAND MATTER?

The distress of the aforementioned Cleveland homeowner certainly matters from a social or humanistic point of view. But the question that I pose to you is this; does this guy matter from an economic point of view?

From the time I attended Graduate Business School at NYU in the late 1970’s until the present, I was taught that the small consumer mattered greatly…was the backbone of the US economy. Financial Metrics such as  ‘Consumer Confidence’ and ‘Consumer Spending’ are closely watched as accepted barometers of the health of the U.S. and World economies and stock markets.

Do I dare question the prevailing wisdom? Do I dare question the relevance of the American consumer?

GLOBALIZATION AND TECHNOLOGY

The dramatic extent to which the business environment has changed since my school days in the 70’s (pre-internet, pre-cell phones, pre-fax machines!) is mind boggling. With the advent of Globalization and the rapid fire way information now moves around the world (I remember the days of waiting by the telex machine, ) I believe that certain  commonly  accepted  economic principles and indicators  may be in  need of  re-examination and modification. For example, while economic cycles will always occur, they may now occur and complete their various stages much more rapidly than in the past. Continuing with that example, I have heard from prominent Real Estate Business people that the talk in New York, London and Dubai now concerns when to swoop in and buy Florida Real Estate. Europeans are already flooding the Manhattan real estate market. It is, therefore, apparent to me that the bottom and rebound in Florida Real Estate will be much sooner than originally anticipated.

Remember all the talk and predictions about the Chinese and the Oil producers dumping dollars and selling U.S. Treasuries for Yen and Euros? Some analysts warned that the selling pressure would further hasten the decline in the dollar and throw us into a severe economic downturn. Guess what? It’s not happening. Rather, U.S. stocks are being bought on the cheap, and that is helping   prop up our Financial Companies who need liquidity.

From an economic perspective, the earth is spinning ever more rapidly on its axis and this will necessitate a change in the way we plan our financial futures. With literally billions of new consumers from China, India, Russia and the developing world, I am no longer sure how much the average U.S. consumer in Cleveland impacts the larger picture. An investment in companies such as Google or Apple Computer is now an investment in Global Capitalism, rather then an investment in a U.S. Company. As you read this piece, mouse clicks in Hong Kong or Moscow are translating into sales for  these  2 companies.

SO HOW WILL WE ADJUST TO THIS IN 2008?

Following this thesis, I would recommend an overweighted allocation of investments in Large Global Technology companies and a corresponding underweighted allocation  in domestic Large Value Companies. I think there will be continued pain and suffering for the  large U.S. and Foreign Financial Institutions and they should be underweighted for now as well.  I alluded to it earlier, but I am now going out on a limb and predicting that the Real Estate malaise, especially in Florida, will be shorter than I originally expected. It may be Ok to start getting your toes wet in this area, as we move into the latter part of 2008 or early 2009.

AND THE POOR GUY FROM CLEVELAND???

Inflation is on the rise, manufacturing continues to be outsourced and credit is still tight. For the consumer on the edge, it will be increasingly more difficult to manage in 2008. Will that throw the U. S. economy into a funk? Will it matter for a Global Technology company such as Google? I don’t have the answers now, but I will be watching very closely for the answers as we move through 2008.

There are many contemporary political and economic analysts involved in the debate as to the true costs and benefits of globalization. Irate advocates for the American middle class, such as CNN’s Lou Dobbs, rail against the outsourcing of American jobs. Regardless of where one stands on this complex, multidimensional issue, there is one thing of which we can be certain. In our increasingly fast paced world, the Globalization train has already left the station. There is no turning back. The challenges confronting us today are beyond geographical boundaries and the idea of a   “go it alone” approach represents antiquated thinking.  Will things turn around for the guy in Cleveland and throughout the rust belt?  I certainly hope so. Unfortunately, I also know that the harsh reality is that the engines powering the Global Capital Machine will continue to hum with or without his participation

Austin A. Frye, MBA, JD, CFP®

Postcript: On the bright side, Cleveland is adjusting. It is an emerging area for biotechnology and fuel cell research as well as a recognized new leader in cutting edge regional wireless networking projects. In fact, the city was recently selected as the only American city among the finalists for the “Intelligent Community of the year” award. The lesson here being that in this new economic paradigm, there is seemingly infinite opportunity for innovative new ideas. Those who can recognize this and adjust will prosper. Pining away for the good old days is counter-productive and to no avail.

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